Martin Lewis: A warning for all wannabe first-time buyers or even those years away from buying
Never owned a home? Open a Help to Buy ISA – even if you've no savings, just put £1 in. This special ISA – that gives first-time buyers up to £3,000 free towards their first mortgage – closes to new applicants on 30 November 2019, so there's now less than six months left. Yet open one before then and you bag the facility in case you ever need it later.
For many parents who want to give their children money, this is worth looking at. Though actually it's just one of two ISAs which give first-timer buyers free cash.
With both, as well as interest, a 25% bonus is added to your savings, ie, a £250 boost per £1,000.
Are you eligible?
A first-time buyer is someone who has never owned or part-owned anywhere worldwide. Even if you once inherited a property then sold it, I'm afraid you're not a first-time buyer.
ISAs are individual products, so you can qualify for one even if you're buying with someone who's owned before. If you're both first timers, you can have one each (one can be a LISA, one a H2B ISA).
To open a H2B ISA, you just need to be aged 16+. To open a LISA, you need to be age 18-39 – so if you're nearing your 40th birthday, get £1 in to open one in case you need the facility later. Those already over 40 should be looking at a H2B ISA while they are still available.
Help to Buy ISA vs LISA? There's only one way to find out, FIGHT...
As noted, while you can have both, you can only get the 25% homebuyer's bonus on one. A LISA can also be used for retirement savings, and then accessed when age 60+, but it is less attractive for this. So here's a brief rundown of the differences (more details in the main guides linked to above).
- The LISA bonus can be £1,000s bigger. You can save far more in a LISA – up to £4,000 each tax year (as a lump sum or monthly sum) until aged 50. With H2B ISAs, you can save a maximum £1,200 in the first month and up to £200/month after that, getting the bonus on up to £12,000.
This can make a big difference. For example, open a H2B ISA today, max it out for two years and you'd have £5,800 in it, meaning a £1,450 bonus. With a LISA, you could put £4,000 in today and £4,000 in on both 6 April 2020 and 2021 (the new tax year). That's £12,000 saved – a bonus of £3,000.
- LISAs lets you buy a bigger property. Both can be used with any mortgage on any residential property, up to a set value. For H2B ISAs, the limit's £250,000 (£450,000 in London), for LISAs, it's £450,000 everywhere.
- The H2B ISA bonus can be triggered faster. To get the H2B ISA bonus, you need £1,600+ saved, which is doable in just three months. Yet LISAs only pay the bonus if they've been opened for a year or more (consider opening a LISA with £1 now to start the clock).
- LISA bonuses can be used for buyers as well as mortgage deposits. The LISA bonus is added each month – meaning it can be used to give the seller the 10% deposit most request at the point of contract exchange.
The H2B ISA bonus only comes after that, when contracts complete, so it only helps as a deposit to reduce your mortgage borrowing.
- H2B ISAs let you withdraw penalty-free. That means even if you're not sure you'll buy a house, they're a no-brainer. Yet with LISAs, you pay a 25% penalty to withdraw cash, unless it's for a home or you're age 60+. But as you've already had the 25% bonus, it works out you lose 6.25% (£62.50 for each £1,000 saved). So only save in a LISA if you'll definitely buy a qualifying house.
- H2B ISAs tend to have better interest rates. For the latest rates see Top H2B ISAs and Top LISAs, though if a LISA is right for you, if you've enough savings to max or near max it out, its far bigger bonus makes up for the lower interest.
So in summary, if you're 18-39, will definitely buy a home costing under £450,000, can max out the savings and won't buy within a year, go for a LISA as you will get a bigger bonus. If you're older, need to buy quickly, aren't saving that much or aren't 100% sure you'll buy at all, it's safer to stick with a H2B ISA.
Consider putting £1 in (possibly both) now just in case
If you think you'll need these but aren't sure, just open them. You need £1 in a H2B ISA by 30 November 2019 or you lose the opportunity. LISAs don't have an end date, but have the 'it must have been open a year to get the bonus' rule, so £1 in now gets that clock ticking. If both are open, you can decide later which is best.
However if you're ready to start saving and want a H2B ISA, then as you can save up to £1,200 in a H2B in the first month, and only £200/mth after, it's best to wait until you've the max amount to open it, as long as it's before 30 November.
I do have long-term concerns about LISA viability, as they've not been successful. The Government should keep the H2B ISA going – I'm going to ask, though doubt it will.
They're a great way to save for older children
If your kids are 16+ for a H2B ISA or 18+ for a LISA, the bonus means these are a great place to give them money to save in, if you have it. So it may be worth suggesting they open the H2B ISA now before it closes and they lose the choice.
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